Will carrying a credit card balance hurt your credit score?

While Credit cards can make handling daily expenses much easier, they can also cause many financial problems.

credit card

First, credit card companies impose high-interest rates, which can make purchases very expensive with time if you carry a balance. Furthermore, these cards are so tempting that most people often overspend—mostly with cash they don’t have. 

But is it a bad idea to carry a balance? And how does it affect your credit score?

Ideally, it would be best to only carry a credit balance in some circumstances, such as paying off consolidated loans with a 0% APR credit card. But if you’re piling debts without a specific goal, you’ll wreck your finances. 

Does carrying a balance affect your credit score?

Carrying a credit card balance may impact your credit rating in various ways. But the most significant effect is on your credit usage ratio. 

Credit utilization measures the amount of credit available for use. It compares the recorded balance and credit limit on a credit account. For instance, if your credit card has a balance of £1,000 and a credit limit of £4,000, the utilization of your credit card will be 25%. 

Consumer Financial Protection Bureau (CFPB) advises individuals to maintain their credit utilization under 30% of the total credit available. 

Often, people using credit cards record balances near the statement time. And with many credit cards, this occurs about two to three weeks before the payment is due. Therefore, you can fully pay your bills and still see the last balance and credit utilization. 

Wrong reasons why people carry credit card balance

1. You’re using a credit card to earn rewards

Credit cards that come with the most privileges, such as travel credit cards, often charge higher APR rates to compensate for the perks. As a result, most individuals pursuing rewards overspend and carry a credit balance. 

Assuming that the APR of a regular credit card is over 17%. Meanwhile, most travel credits regulate revenues at a 4% cashback bonus and 2% back in ordinary spending. 

2. You’re using credit as a crutch

If you often spend more than you can afford every month, then monitoring your expenditures and following a monthly budget might significantly help you out. It may help you stop depending on credit cards. 

Your best option is to determine how much you should cut back so you can save something from your monthly income. This way, you will stop piling up your debt and embark on clearing off your existing debts. 

Alternatively, you can take out quick loans such as payday loans best UK from Viva Loans to keep you afloat until your next payday.

3. You are paying off a large purchase

Keep in mind that credit cards are not convenient for short-term loans—their interest rates are just too high. If you want to buy home appliances, finance a major home renovation project, or pay for emergency medical bills, and you don’t have cash, it would be better to go for a personal loan with lower APRs instead of using a credit card. 

4. You’re trying to improve your credit score

Most people believe that carrying a balance on credit cards can boost their credit ratings—a total myth. According to the CFPB (Consumer Financial Protection Bureau), the best approach to boost your credit score and maintain it for long is clearing your credit card debt monthly. 

The CFPB recommends that you take the following steps if you wish to improve your credit score: 

  • Maintain a low credit balance
  • Avoid applying for credit cards unnecessarily
  • Constantly confirm your credit records from the bureaus and correct any error, if found

Remember, paying interest does not improve your credit score, so there is no need to carry a credit balance.

You can also consult credit counsellors from reliable institutions such as Reform Debt Solutions to help you manage your credit. 

Should you leave a balance on your credit card?

Generally, it’s better to clear off your credit card balance monthly rather than spin the debt. 

If your credit card is new and you have the 0% APR offer, settling the full statement each month means you’ll not pay any interest for your purchases. However, failing to repay the full amount of your credit card debt every month will cost you additional charges later. 

Benefits of paying off your credit card

There are multiple advantages of paying your credit card balance every month. While some affect your credit score, others impact your creditworthiness and personal finances. Some of the benefits are:

  • Avoiding interest: clearing your credit card debt monthly will help you avoid incurring interest costs on purchases. 
  • Keep a low utilization rate: Maintaining a low credit utilization rate can be easier if you avoid carrying a credit balance, accruing interest, or allowing your credit balance to pile up. A low utilization rate also boosts your credit score.
  • Reduce debt-to-income (DTI) ratio: Besides credit scores, lending firms often consider your DTI ratio. This is the ratio of your monthly revenue to debt payments. Having a credit balance increases your DTI ratio, making it hard and expensive to secure a loan

Bottom Line 

Clearing off your credit card balance each month can help you avoid incurring interest costs. You can quickly achieve this by only using a small percentage of your available credit. And it may result in a lower credit utilization rate, improving your credit scores and easing your debt burden. 

However, paying credit card bills in full isn’t always realistic. While carrying a balance might not be ideal for your credit score, it might be necessary until you pay off the credit card debt. And if your card has a promotional interest rate, it might make sense to focus on other debts or bills first.